5 Financial Lessons You Must Teach Your Kids

By Lisa Smith AAA

When the topic of investing comes up, most people's thoughts jump straight to stocks and bonds. While those basic investing tools have certainly been responsible for their fair share of wealth creation, they both require an initial investment of cash. Cash, of course, must come from somewhere.

For most of us, that "somewhere" involves getting a job. Learning about the connection between work and money is a lesson that all of us pick up somewhere along life's path. Teaching that lesson to your children is a great way to help them avoid financial pitfalls later in life. (For more, see What Are You teaching Your Kids About Money? and 5 Lessons Monopoly Teaches Us About Finance And Investing)

Lesson 1: It Takes Money to Make Money
This tried-and-true saying is often even more applicable to young investors than it is to their parents. After all, few teenagers can expect to be granted stock options or issued an equity stake in a startup company.

So, if your child is looking to get that new video game, buy a bike or get a ticket to the prom when the bank of mom and dad is all tapped out, it's time for junior to learn how to earn. (Read Opening Your Child's First Bank Account for more.)

Lesson 2: You Need a Goal
It's been said many times by many people - nobody plans to fail, but many fail to plan. This basic rule of thumb applies to children as well as to adults. It starts by setting a goal and then developing a plan to reach that goal, whether that goal is buying a car or a new mp3 player.

Either way, once the desired item has been identified, your budding young laborer can put a price tag on the impending acquisition and set a time frame for achieving the goal. Next, it's time to come up with a plan to get the cash. While the goal may be small, at least from an adult's perspective, the strategy to achieve it works the same way it would for an adult. Your little man or woman with a plan now has a clear-cut objective and a strategy for getting the job done.

Lesson 3: Income Counts
Beyond the tales of fantastic wealth and private islands in the sun inherited from one generation of the wealthy to the next is the more common type of wealth: money generated through employment. Going to work every day is the first step to affluence for the vast majority of investors. It's also a lesson in reality for kids.

Junior's first job is likely to be something basic, such as selling lemonade, baby sitting, pet walking, cutting grass, raking leaves or shoveling snow. The job itself isn't all that important - the connection between work and goal achievement is the basic point of the exercise.

If the kids are too small to work, consider an allowance. Doing chores at home is another way to build responsibility and prepare the kids for the future. (Read Use Allowances To Create Financially Sound Kids to learn more.)

Lesson 4: Rewards Feed Motivation
After the appropriate amount of capital has been raised, a purchase can be made. It's time to spend and enjoy! Of course, it's also time for a quick chat about saving and investing. (Read Teach Your Child About Investing for some easy instructions on how to introduce your kids to the stock market.)

Lesson 5 and Beyond: Work Leads to Reward
Teaching the kids about the connection between work and the obtainment of goods and services does more than help them buying them a new toy. It also teaches them valuable life skills that will last far longer than any material object they purchase.

They will come to understand that it takes effort to make money. They'll also gain perspective on the value of planning and goal setting. This exercise is the first step toward building a strong work ethic and teaching children to have pride in a job well done.

Contacting neighbors, friends and relatives is also a good lesson in networking. Teaching your kids about the power and value of making connections is a lesson worth learning all by itself. The realization that it's far harder to earn than to spend is also critically important.

The Bottom Line
The last lesson is all about the ability to make choices. From choosing the goal to choosing the job to choosing whether to spend or save, the multitude of experiences provide great opportunities for you to teach your child about all of the challenges and opportunities that life presents. Remember, it's not the amount of money your child earns, but the lessons they learn that count in the long run. (For more, read Teaching Your Child To Be Financially Savvy.)

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